Unemployment Benefits - Example

Unemployment Benefits Name Institution Unemployment Benefits Introduction Today, within every economy, the biggest challenge is the persistence and the existence of unemployment. The situation has been attributed to rise in population, stagnation in economic growth or fluctuation in economic growth (Gordon, 2004). As the population rises in countries, government finds it hard to provide employment for its people. The case is similar to when economic takes a longer time to grow. Romer (2011, p.458) when unemployment is left to grow, it could strongly hurt the general economic in the long run. The situation has prompted governments to find a solution to save the situation. Unemployment benefits have emerged as one of the effective policies to that effect. Unemployment benefits serve to subsidize unemployment by lowering the costs of unemployment to unemployed people. However, the policy also has its faults. Accordingly, a rise in unemployment benefits will increase the level of unemployment ceteris paribus. Therefore, this paper will discuss unemployment benefits in this context with an aid of diagrams. Overview of unemployment In the recent years, has increased tremendously as a result of various reasons such as an increase in population, stagnation in economic growth or fluctuation in economic growth, globalization, disruptive technology and aggregate demand, hence different types of unemployment (Romer, 2011, p.461). In fact, International Labour Organization (ILO) report of 2013 claims that over 198 million people across the globe were jobless by 2012. Different theorists have come up with different types and theories to explain unemployment comprising of Keynesian or cyclical unemployment, structural unemployment, classical unemployment and frictional unemployment. Keynesian unemployment takes place when there is no adequate aggregate demand of a product within the economy which can provide employment (Gordon, 2004). If the demands for products drop, few workers will be needed by the employers because less production will be required. Such unemployment takes place during economy downtown such one of 1930s (Romer, 2011, p.466). On the other hand, classical wage unemployment takes place when real-wage is paged above the level of the market making several job-seekers to surpass the available vacancies (Romer, (2011, p.466). Numerous economists argue that government regulation and setting of minimum wage raises cost for low skill workers over the market equilibrium leading to increase in unemployment. This is because people who desire to work at the current rate cannot because it has low value. In a nutshell, it leads to slow growth in a labor market as depicted in figure 1. The situation has prompted many people to leave employment since it adds less value to their lives. Krueger & Meyer (2002, p.2334) contended that structural unemployment has also been created when the skills do not match the job requirements. An example is the introduction of a new technology in production renders many people jobless since they may not be familiar with the operation of a machine. Arthur Okun has gone ahead to explain the consequences of unemployment using what has become Okun’s law (Knotek, 2007, p.75). He argued that for each 1 percent rise in the rate of unemployment, there will 2% decline than in potential GDP. This is demonstrated using a graph (see figure 2). Figure 1: slow economic growth in various countries as a result of slightly high minimum wage. Source: (Australian Government National Commission of Audit, 2015) Figure 2: Okun’s law Source: (Gordon, 2004, p.16) Unemployment Benefits Unemployment benefit is defined as social welfare compensations provided by the government or authorized body to unemployed individuals (Garside, 2002). The form of benefits could be done of the basis of an obligatory para-governmental insurance mechanism. The funds are offered based on the status of an individual and jurisdiction and could cover just the basic need and lost time relative to the past earned salary. However, in general unemployment benefits are often provided to only people registered as unemployed and don’t have a job, on conditions that they look for work (Friedman, 2002). In some countries, the scheme has been practiced by the government for quite sometimes. For instance, in the United Kingdom, unemployment benefits were first launched through the National Insurance Act of 1911 (Garside, 2002). Garside (2002) went ahead to state that the key measure was to fight the growing impacts of Labour Party amongst the working-class people in the country. The Act presented the working class with a contributory mechanism of insurance against unemployment and illness. It just used with wage earners, though, and their households and unsalaried have to depend on other income sources for support. However, in the US, unemployment benefits make up one of the key elements of social security systems (Card, Chetty & Weber, 2007, p. 1521). It offers income to those who involuntarily lost their jobs. Research reports that the benefits are normally still positive in the first year of job loss (see figure 3). The figure shows the benefit replacement rates of income in the first year. The regular compensation is paid weekly and replaces 50-80% of the pre-employment income which is normally provided at the state level (Card, Chetty & Weber, 2007, p1526). For Australia, unemployment benefits called Newstart Allowance is provided by government through a body called Centrelink (Australian Government National Commission of Audit, 2015. These benefits are provided to jobless individuals between the age of 22 and 64. According to Australian Government National Commission of Audit (2015), Centrelink argue that current unemployment benefits of Australia arrangements have to be maintained as a key pillar of social safety net. However, before one is provided with such benefits, they are tested if they eligible for assistance by government. Figure3: Replacement rates of benefits in the first year of job loss Source: (Burtless & Gordon, p.252) Figure 4: Payment rates of Newstart Allowance and the income tests Source: (Australian Government National Commission of Audit, 2015) The figure demonstrates that in Australia, unemployed individuals with personal income of nearly $25,000 annually are also entitled to unemployment benefits (Australian Government National Commission of Audit, 2015). This income support is higher than the maximum of Newstart program. Effects of Unemployment Benefits on Consumption The major goal of unemployment benefits policy is to compensate for the portion of lost income for the unemployed individuals hence enabling them to keep their consumption level reasonable in spite of not earning salary (Browning & Crossley, 2001, p.7). Though it might be considered as obvious for unemployment benefits to increase consumption, the level at which it happens relies on numerous elements. One of such elements is the amount of money an individual has been saving before being unemployed (Browning & Crossley, 200, p. 12). Most families in developed countries have savings and have some real estates. Although, the savings amount is usually small, families that have very low-income generally do not have savings. For individuals who have a lot of savings, levels in consumption may fairly remain high even if there are no benefits of unemployment (Fredriksson & Holmlund, 2006, p.358). According to Farber & alletta (2013), a few individuals who are not employed use a little of their unemployment benefits to pay debts instead of using it all. Some unemployed individuals have ways on other means of income. For example, most countries have means-tested transfer schemes which offer income support to families that have less income. Tatsiramos & van ours (2012) posited that, however, since this scheme usually accept individual who are unemployed to retain their earlier levels in consumption, the additional impact of unemployment benefits is likely to be little. Within several families when one member is laid-off, other members holding jobs can assist maintain family consumption, even with no unemployment benefits (Schmieder, von, Wachter & Bender, 2012). Nevertheless, while with all these means of retaining some consumption after being unemployed, the evidence shows that unemployment benefits schemes raises consumption significantly. An evidence is shown, for instance a ten percent rise in the unemployment scheme replacement rate decreases the fall in consumption along with individuals who are unemployed by 2.66 percent and individuals who do not get unemployment benefit program have to decrease their consumption by 23 percent more (Browning & Crossley, 2001, p.17) Replacement rates of over 83 percent—the case in a little fraction of nations—allow families to retain levels of consumption at their pre-unemployment levels wherein having savings to increase the payments in unemployment scheme (Card, Chetty & Weber, 2007, p1526). The increase in consumption plays an important role in the economy during the economic recession. When there is an increase in unemployment, income and spending of the workers’ decreases. Gordon (2004) argues that the demand of products decreases due to the reduction in spending, hence making industries to decrease in output, employment and production, that further lowers production and spending again. Unemployment benefit schemes ensure that the income of the unemployed is stabilized and there is a decrease in the spending (Tatsiramos, & van Ours, 2012). Therefore the net effect is to decrease the fall in gross domestic goods and to ease the effects of a decline. In an economy, unemployment benefit scheme is also known as “automatic stabilizers” (Gruber, 200, p.195). When the economy is growing, they do not offer more benefit hence there is no increase in the spending. However, when the economy fluctuates, definitely there is the rise in spending, which is viable at that level of business life cycle. Effects of Unemployment Benefits on Poverty An extra question for unemployment benefits schemes is if the country’s rate in poverty has reduced. Theory states that they decrease the aggregate rate in poverty by nearly 1% point (Gordon, 2004). The result is good for individuals who are getting unemployment benefit; the rate of poverty for the group reduced from 22.6 to 13.5 percent due to the scheme (Lalive, van Ours & Zweimuller, 2006, p. 1013). Effects of Unemployment Benefits on Employment The introduction of an unemployment benefits scheme reduces the risk of getting a job then later on being dismissed by insuring partly over that risk (Rothstein, 2011, p.145). Therefore, it is commonly known as entitlement result of unemployment benefits scheme. Since most countries have qualifying time of work for unemployment benefits program eligibility while some have minimum levels of earnings, individuals who do not have those requirements have a reason to work extra, get more earnings so as to meet them (Rothstein, 2011, p.162). Evidence for the US shows the current entitlement effect, and how it operates in the different direction. Individuals who reside in areas with an increase in unemployment benefits program are expected to acquire jobs which offer earnings surpassing the minimum level needed for eligibility (Friedman, 2002). Individuals who reside in parts that have lower unemployment benefits schemes are expected to acquire jobs with little earnings for eligibility. As a result the unemployment benefits scheme has yielded positive effect and compensated some of the negative effects that might occur from extra sources. Effects of Unemployment Benefits on Job-seekers One of the disadvantages is that it could encourage unemployment. Friedman (2002 claims that unemployment benefits has a side effect of encourage individual getting such benefits not to search widely for the new jobs that they would have if they were not receiving the benefits. The first reason for this is that benefit of search for a new job become lower for a person getting befits at the period of maximum benefits (Burtless & Gordon, 2011, p.253). When the unemployment benefits do not exist, the benefit will just be the wages derived from a new job. Existence of unemployment benefits means that such income is decreased to the disparity between an unemployment benefits and income that could have been paid by the new job. The disparity can be termed moral hazard according to insurance terms (Chetty, 2008, p.174). The moral hazard is considered an undesirable consequence of unemployment benefits. In most cases, people change their behavior when they are eligible for the benefit program since it also changes economic incentives (Romer, 2011). This reason boarders the increase of minimum wage by some countries. As stated earlier, when a countries increases the minimum wage many people will finds it worthless to stay in the job. Similarly, it will discourage jobseekers from looking for work, and instead they will register for unemployment benefits (Rothstein, 2011). Therefore it can be concluded that unemployment benefits scheme relieves employment pressure and makes unemployed people to continue with consumption and not to accept an unsuitable job. Normally, unemployment benefit policy is funded by the payroll taxes, and this could lead to more lay-offs. In the Unite State, the unemployment benefits are funded by the company tax which is done the basis of how many staff a firm has previously laid-off in policy referred to as experience rating (Friedman, 2002). Firms which lay-off more employees typically pay more unemployment benefits compared to the ones which lay-off few employees. Since the number of jobless people keeps on rising, companies may be forced to lay-off to fund unemployment benefits. Krueger & Meyer (2002) asserted that some of the industry which may be forced to lay-off people include construction companies which highly reliant on economic conditions and weather. Later these employees are often rehired. Conclusion From the essay, the research has established that countries provide unemployment benefits with a primary goal of creating stability in their economy. The scheme helps households experiencing low incomes due to maintain consumption and reduce the rates of poverty. However, the policy also has its flaws. This program can encourage many people to lower their intensity of job search and lengthen the period of unemployment. Similar, it can also lead to more people getting laid because the funding of the scheme, in other countries, depends of the number of people. For that reason, this paper concludes that economic policy makers need to create a sense of balance between the merits and demerits of this scheme. It can be attained the creating the levels of benefit and duration which enable people to look for a job as fast as possible. References Australian Government National Commission of Audit. (2015). 7.11 Unemployment benefits and the minimum wage. Retrieved from http://www.ncoa.gov.au/report/phase-one/part-b/7-11-unemployment-benefits-and-the-minimum-wage.html Browning, M. & Crossley, T. (2001). Unemployment insurance benefit levels and consumption changes. Journal of Public Economics 80 (1), 1–23. Burtless, G. & Gordon, T. (2011). The federal stimulus program and their effects. In: D. B. Grusky, B. Western, and C. Wimer (eds). The Great Recession. New York: Russell Sage Foundation, pp. 249–293. Card, D., Chetty, R. & Weber, A. (2007). Cash-on-hand and competing models of intertemporal behavior: New evidence from the labor market. Quarterly Journal of Economics 122(4), 1511–1560. Chetty, R. (2008). 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Labor market effects of unemployment insurance design. IZA Discussion Paper No. 6950. Read More